New Entitlement Not Needed For Prescription Drugs

Commentary by John C Goodman

August 13, 1999

Medicare is facing a future financial collapse. By the time today's college students reach retirement age, workers will have to pay Medicare taxes equal to one out of every seven dollars earned, just to pay for benefits currently promised.

Instead of solving the problem, President Clinton wants to make things worse. He's proposing the biggest new entitlement in Medicare's 35-year history. Although Medicare covers most hospital and physician services, it doesn't pay for most prescription drugs. To address the problem, Clinton wants to add a drug benefit to Medicare that would require spending $118 billion over the next 10 years.

Currently about 65% of seniors already have drug coverage. Although some seniors do face prescription drug expenses that they cannot afford, why create a benefit for everyone for a problem suffered by a few? Surely there is a better way.

Two principles should govern any type of Medicare reform. First, taxpayers should not have to fork over any more money to pay senior citizen medical bills. People age 65 and older have more assets and more aftertax income per capita than those under age 65, so any reform that increases the tax burden of Medicare is taking from the poor to give to the rich.

Second, the private market should be freed to meet the needs of the elderly with money already existing in the system. Medicare violates almost every principle of sound insurance. The program pays too many small bills the elderly could easily afford on their own, while leaving them exposed to thousands of dollars of potential out-of-pocket expenses. No private insurer would be allowed to sell a plan with these gapping holes.

In order to fill some of the gaps left by Medicare, about 75% of seniors acquire, often through a former employer, supplemental (medigap) insurance. But the combination of medigap insurance and Medicare is very wasteful. Health economists estimate that seniors with both types of coverage spend about 30% more on health care than those with Medicare alone.

Instead, seniors should be able to take advantage of the same health insurance options routinely available to the non-elderly. For example, some 16% of seniors have shifted out of traditional Medicare and into an HMO, of which 95% provide a prescription drug benefit. However, the Clinton administration and a Medicare bureaucracy hostile to any challenge to its power have combined to halt and even reverse this trend. After the administration cut reimbursement rates to Medicare HMOs this year, many dropped the program, leaving 450,000 seniors, many who had drug coverage, scrambling to find another HMO or return to Medicare. Another 99 HMOs intend to leave next year, affecting 325,000 more seniors.

For those who don't like HMO type restrictions on choice, there is another option. Private insurers could offer a traditional fee-for-service plan with a high deductible. A National Center for Policy Analysis study concluded that a private plan could cover hospital, physician and drug costs above a $1,585 across-the-board deductible - all with the average amount Medicare currently spends on each senior. Although a deductible of that size seems like a lot of money, many seniors are already spending $1,500 to $2,000 a year for medigap coverage.

These changes would solve the problem without imposing any new taxes. At a time when Medicare is in financial trouble, it makes much more sense to use current dollars more wisely without creating and new expensive Medicare benefit.